“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
PERRIGO CO. PLC $44(New York symbol PRGO, Manufacturing sector; Shares outstanding: 136.0 million; Market cap: $7.0 billion; Dividend yield: 1.0%; Takeover Target Rating: Medium; www.perrigo.com) took its current form in June 2013 when it merged with Irish-based drug maker Elan Corporation, plc. The combined firm is now based in Dublin, Ireland.
The company is one of the world’s largest makers of over-the-counter (OTC) health-care products. Those include treatments for cough, cold, allergies and pain. It also makes antacids, vitamins, smoking-cessation products, baby formula and food, and animal health products.
Perrigo sells those products mainly under the private-label brands of retail chains. Walmart is its biggest customer, accounting for about 13% of overall sales. The U.S. supplies 65% of its sales, followed by Europe (29%) and other countries (6%).
Perrigo reported sales of $4.23 billion for the fiscal year ended June 30, 2015. In 2016, it changed its fiscal year end to December 31. Sales then fell 6.3%, from $5.28 billion in 2016 to $4.95 billion in 2017. Sales dropped another 4.3% to $4.73 billion in 2018. Those declines were due to the sale of less-important businesses, including operations in India, Russia and Israel.
The company earned $0.97 a share (or a total of $136.1 million) in fiscal 2015. However, it lost $28.01 a share (or $4.0 billion) in 2016 due to a writedown. Earnings rebounded to $0.84 a share (or $119.6 million) in 2017, and rose again to $0.95 a share (or $131.0 million) in 2018.
Perrigo now plans to sell or spin off its prescription pharmaceuticals unit. It makes topical medications that are applied to a specific spot on or in the body, usually the skin or mucous membranes. The company will probably complete the transaction in early 2020.
In the quarter ended March 31, 2019, Perrigo’s sales fell 3.5%, to $1.18 billion from $1.22 billion a year earlier. That’s because pricing competition and unfavourable currency rates offset $54.7 million in sales of new products.
If you exclude costs related to the spinoff and other unusual items, Perrigo’s earnings in the latest quarter fell 18.0%, to $146 million from $178 million. Due to fewer shares outstanding, per-share earnings declined 15.1%, to $1.07 from $1.26. The company spent 3.4% of its sales on research.
Perrigo ended the quarter with cash of $837.9 million. Its long-term debt of $2.75 billion is 39% of its market cap.
The company’s shares are down 40% in the past year. That’s largely because the Irish government claims that Perrigo owes $1.9 billion in back taxes. The company plans to fight the ruling.
Meantime, Perrigo is adding new products to its lineup. It recently agreed to pay $750.0 million for Ranir Global Holdings, a maker of toothbrushes, whitening strips, floss and dentures. The company plans to sell its animal health business to help cover that cost. It expects to complete the purchase in the third quarter of 2019.
The stock now trades at just 9.8 times the projected 2019 earnings of $4.50 a share. The $0.76 dividend yields 1.7%.
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